Pressuring banks to lend more initial problem

December 19, 2009

Freedom New Mexico

Those of us who had anticipated the possibility of a de facto nationalization of the banking and finance sector of the economy after the meltdown last fall and the government’s bailout reaction, may have to rethink our scenarios and happily so.

With the announcement that Citigroup will pay back $20 billion in bailout loans and that Wells Fargo will pay back $25 billion — following closely on Bank of America’s announcement that it will pay back $45 billion — the nine major banks that took bailout money in October 2008 will have repaid or be in the process of repaying their federal loans.

Some of the smaller banks that took TARP money repaid the loans months ago.

Perhaps they will all value their independence from the government a little more in the future.

Most of the commentary on the big banks’ eagerness to pay the money back and get out from under the federal thumb has focused on the government’s control of pay and bonuses for top executives — a stricture that is already complicating Bank of America’s search for a new CEO. But it was more than limits on pay that bothered the banks. They were dying the death of a thousand cuts of micromanagement as government bureaucrats who had never run a business or met a payroll dictated how they should operate.

The government desire to dictate policy to private businesses was perhaps symbolized by President Barack Obama’s summoning the heads of major financial institutions to the White House on Monday to give them a tongue-lashing about not making enough loans to get the economy jumpstarted. This was objectionable, even obnoxious, on several levels.

In the first place, the president placed sole blame for last year’s financial collapse on private financial institutions. While some of them do bear a portion of responsibility, there is little question that government policies and actions — Fannie Mae and Freddie Mac guaranteeing risky financial instruments, the Federal Reserve flooding the economy with cheap money, pressure from regulators to make loans to risky borrowers and much more — bears primary responsibility for the meltdown. President Obama didn’t come close to acknowledging even a minor role for the government.

In the second place, after an orgy of irresponsible lending urged on by government, banks should be expected to be more conservative in their lending policies, and such a correction is healthy for the long-term prospects for economic growth.

The lending pendulum may be swinging a little far in the direction of strict standards, but that will be corrected over time. Institutions risking their own money are more likely to make sensible adjustments than the government, which can and has escaped responsibility for its own foolish actions repeatedly, simply passing the cost along to taxpayers.

President Obama’s impulse to pressure the banks into looser lending policies — the very policies that precipitated the crisis in the first place — shows that government would almost always rather have false economic growth built on sand than solid growth built on real prospects for profit and production.

It would be healthy if banks and other private businesses remembered the impulse to micromanage and bully them into imprudent decisions the next time they are tempted to let the government bail them out after they make mistakes — as being human they eventually will. The next stage of economic growth needs to be built on the conviction that no institution is “too big to fail.”